SAN FRANCISCO (CN) - Wells Fargo's "greed seems to have no bounds," claims a class action that says that bank and others approved fewer than 3 percent of loan modifications after acquiring "troubled" mortgage loans effectively "for nothing."
Jennifer Murphy and 30 other named plaintiffs sued Wells Fargo, Wachovia, World Savings Bank and Golden West Financial in a federal class action.
The class claims the defendants failed to honor a settlement agreement in a class action filed against Wachovia in Northern California.
Wells Fargo purchased Wachovia, and its "Pick-a-Payment" loan portfolio, for $15.1 billion, on the heels of IRS Notice 2008-83, issued Sept. 30, 2008, according to the complaint.
"In a typical merger transaction, the acquiring company cannot use the acquired company's entire operating loss to offset its own profits, but instead, is limited to using $1 billion of those losses per year. The restriction exists to discourage companies from buying failing companies solely to avoid taxes and shelter their own profits," the complaint states. "IRS Notice 2008-83 removed that restriction for transactions involving financial institutions, thereby permitting an acquiring bank to take advantage of the acquired bank's losses in full at any time."
Wells Fargo bought Wachovia on Oct. 3, 2008.
"While Wachovia had substantial liabilities, and Wells Fargo knew that it would need to substantially write down Wachovia's Pick-a-Payment portfolio, the key to the deal for Wells Fargo was that it could use Wachovia's substantial losses to avoid paying taxes on its own profits, which could potentially save it $40 billion in taxes," the complaint states.
During the merger, a class sued against Wachovia over the Pick-a-Payment portfolio, which left "hundreds of thousands of homeowners ... suffering the effects of undisclosed negative amortization," according to the complaint.
In response, in 2011 in San Jose, U.S. District Judge Jeremy Fogel approved a settlement and created a new loan modification program - Mortgage Assistance Program (2MAP2R) - based on objective, rather than subjective, criteria, the plaintiffs say.
The program required Wells Fargo to provide principal forgiveness, "eliminating virtually all of the accrued negative amortization, by reducing a borrower's principal balance to the market value of the home in circumstances where the loan's principal balance exceeded the home's market value."
But the plaintiffs say the bank and program ultimately did little to provide relief to "struggling" homeowners.
"As with the prior loan modification programs, defendants have not followed through on their promises to provide substantial relief to homeowners," the 81-page complaint states. "The numbers are striking. According to Wells Fargo's records, for the period from April 1, 2011 to Sept. 30, 2012, there were 52,252 loan modification requests made by settlement class B members (borrowers who became in imminent threat of default after the parties agreed to the settlement). Of those requests, defendants have completed only 1,055 MAP2R modification (approximately 2 percent). In that same period, settlement class C members (borrowers who were in default at the time the parties agreed to the settlement) made 14,419 loan modification requests, but defendants completed on 691 MAP2R modifications (less than 5 percent)."
Wells Fargo failed to properly hire and train employees to deal with the second mortgage program, the class claims.
"Despite the extensive responsibilities that defendants agreed to take on as part of the settlement, Wells Fargo failed to hire a sufficient number of employees to effectively implement the MAP2R loan modification program. Further, it failed to properly train its employees to implement MAP2R, which has prevented settlement class members from obtaining the loan modification to which they are entitled as part of the settlement," the complaint states.
The class claims Wells Fargo "effectively acquired Wachovia's assets for nothing," and the breach of settlement violates California's unfair competition law.
"Defendant Wells Fargo's greed seems to have no bounds," the complaint states.
"According to a 2011 report issued by Citizens for Tax Justice, Wells Fargo received $17.96 billion in tax breaks from 2008 through 2012, the most of any public company in that timeframe. The result of this transaction meant that while it earned more than $49 billion during that time period, the bank paid no taxes; instead, it received a $681 million tax credit. Thus, Wells Fargo saved more in taxes in three years than it paid to acquire Wachovia. In other words, Wells Fargo effectively acquired Wachovia's assets for nothing."
The class seeks restitution and compensatory and consequential damages for unfair competition and breach of contract, and an order certifying a class, subclass and sub-subclass.
They are represented by Jeffrey Berns with Berns Weiss, of Woodland Hills.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.